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Strategy in Nonmarket Environments

E. Auyang, M. Berthelin, W. Batanghari,

C. Cartwright, A. Ghani, Kimberly Sladkin

Monsanto and Genetically Modified Foods

In 1992 Calgene Inc., a small biotechnology company, embarked upon a revolutionaryendeavor. The company filed a petition with the FDA for approval of a gene used in thedevelopment of its FLAVR SAVR tomato. This product would be the first genetically modified(GM) food to be approved for commercial production. Genetic engineering is a process thatenables scientists to splice plants or animal genes with particular traits into the DNA of otherorganisms. Calgene’s actions nearly a decade ago signaled the advent of biotechnology as ameans for creating food products that could offer substantial benefits over their naturalcounterparts. Although many people lauded the virtues and immense potential offered bybiotechnology, others vehemently opposed tinkering with an organism’s genetic materialbecause of its potential to unleash unforeseen and harmful consequences.

It is within this environment of friction and controversy that the Monsanto Company hasbecome the market leader in harnessing the power of biotechnology to deliver products andsolutions to the world’s food producers. Since engineering Roundup herbicide resistant cottonand corn in the mid-1990’s, Monsanto has paved the way for the introduction of geneticallyaltered crops products into the market. Recently, GM foods have received much mediacoverage. European environmental organizations and public interest groups have been activelyprotesting against GM foods for months, and recent controversial studies about the effects of GMcorn pollen on

monarch butterfly caterpillars have brought the issue of genetic engineering to theforefront of the public consciousness in America. In response to a rising tide of public concern,the FDA has begun to solicit public opinions and initiate a process of establishing a newregulatory procedure for government approval of GM foods.

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Proponents of GM food insist that as the world population continues to grow, ensuring anadequate food supply for the booming population is going to be a major challenge.Biotechnology promises to meet this need through the design of crops that are resistant to pests,herbicides, harsh weather, and disease. Furthermore, by genetically engineering foods to containadditional vitamins and nutrients, malnutrition worries can be alleviated. On the other hand,environmental activists, public interest groups, professional associations and governmentofficials have all raised concerns about GM foods and criticized agribusiness for pursuing profitwithout concern for potential hazards. Concerns about GM foods include their potential to harmother organisms, latent human health risks (allergies, unknown long-term effects), and thepossibly prohibitive pricing of GM seeds that would widen the gap between the wealthy and thepoor, on domestic and international levels.

One of the biggest issues in the ongoing debate over GM foods is whether they should belabeled in America in order to protect the public’s right-to-know privileges. Furthermore,regulatory trends in European nations are drawing greater scrutiny to this issue in the UnitedStates. Clearly, Monsanto’s objective is to avoid FDA labeling of GM foods because such actionwould draw additional public attention to the issue and serve as a focal point upon whichnonmarket action could bedirected.

Issue Analysis

Given the highly palpable impact that such an issue has on the general public, it can beexpected that the labeling question will attract considerable interest. In Monsanto’s “corner” areadditional members of the so-called "Gene Giants,” other heavyweights of the biotech industry,farmers, and farming equipment manufacturers. Unlike Monsanto, many of the other GeneGiants are well diversified in other industries, such as chemicals, and therefore have more atstake if a highly visible and contentious battle were waged. Indeed, two of the industry’sMonsanto and Genetically Modified Foods

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behemoths, DuPont and Aventis, have succumbed to nonmarket pressures and spun off theirbiotech concerns.

Spearheading the opposition is the slew of activist groups that are somewhat

disorganized inthat they so far have not been able to present a united resolve and effort. Due to the highlytechnical nature of this issue, consumers are confused by the bevy of contradictory and oftenambiguous information, which in part explains whythey have not been more active inchampioning the labeling cause. Meanwhile, the institutional arena in which this food fight isunfurling is Congress (Exhibit 1).

“Positive” labeling would place the onus on GM food manufacturers to inform consumersthattheir products contain GM ingredients and would create an expensive supply chain withtraceability to separate GM from non-GM food (Exhibit 2 & 3). Bob Shapiro, CEO of Monsanto,fears that consumers will erroneously assume that GM foods are either less nutritious or healthythan their organic counterparts when he in fact believes that there is no palpable differencebetween the two1. Clearly, the extra cost of traceability and the risk of a dwindling demandwould doom the existence of GM products.

On the life cycle issue, this problem is quickly approaching the steep upward slope betweenthe Interest group formation phase and the Legislation phase, implying that it is imperative forMonsanto to take strategic action in the nonmarket arena in order to successfully shape its future.

Interest Group Analysis

Although the Monsanto brand name does not prompt instant recall in most consumers’minds, it has not been exempt from private nonmarket action, and is currently facing a difficultand convoluted fight against

public nonmarket action. Adding complexity to the nonmarket

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In 1992, FDA stated that genetically engineered foods are similar to those produced by traditional plant breeding,and are hence generally recognized as safe. Today, an estimated 60% of all processed foods contain at least onegenetically engineered component.

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arena is the fact that Monsanto can only mobilize certain parts of its rent chain: Kraft, Frito-Lay,and other consumer product companies have taken a stance supporting labeling of GM foods,dissolving any potential for cohesive coalitions between Monsanto and this portion of the rentchain.

The American Consumer

Consumers, to varying degrees, understand how biotechnology relates to what they buy atthe supermarket. Despite the numerous legalproceedings at the local, state, and federal levels tointroduce mandatory labeling of all GM foods, activist groups have been working hard to raiseconsumer awareness to a level that has forced more “successful” private nonmarket action.

Numerous surveys show that while Americans might support the idea of labeling GM foods,they are still quite confused about the entire issue of biotechnology and how it plays out in theirown lives. Exhibit 4 summarizes the results of polls reporting consumers’ awareness of GMproducts. The most revealing survey is one conducted by the International Food InformationCouncil (IFIC). While 79% of respondents have heard of biotechnology, only 20% felt well-informed about its role in improving agriculture.Consumers are confused, and as a result,activists have waged small battles on many fronts, without stronger grassroots support.

Activist Groups

As a result of this consumer “confusion,” interest groups have formed based on a number ofobjections, specifically those grounded in moral, distributive, ethical, and religious beliefs. TheAlliance for Bio-Integrity summarizes the main concerns of these activist organizations (Exhibit5). Of the many activist groups focused on the issue of GM foods, only a few have risen above

the local fray to take a more prominent national role. In July 2000, a coalition of sevenorganizations announced their united commitment to “the removal of [GM] ingredients fromgrocery store shelves until they are adequately safety tested and labeled.”

The GeneticallyMonsanto and Genetically Modified Foods

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Engineered Food Alert (GEFA), consisting of a host of consumer advocacy and environmentalistgroups, provides “web-based opportunities for individuals to express concerns about [GM] foodsand fact sheets on health, environmental and economic information about [GM] foods.” GEFAhas taken a highly visible position in the current debate, as evidenced by its publicly applaudingKraft’s recent recall of its “Taco Bell” taco shells that were contaminated with Starlink, a GMcorn not yet approved by the FDA for human consumption.

Another major activist group, The Campaign to Label Genetically Engineered Foods, exists“to create a national grassroots consumer campaign for the purpose of lobbying Congress and thePresident to pass legislation that

will require the labeling of GM foods in the US.” Even RalphNader has inserted himself into the campaign. In fact, organic grocers are helping to finance thiscampaign since GM labeling will benefit them. Many other activist organizations exist, but theones listed here appear to be the most well organized and visible on the national landscape.

Activists generally pursue two main strategies: applying direct pressure on a target companythrough public protests (private nonmarket action), and adopting grassroots campaigns to petitionpublic institutions to promote change (public nonmarket action). In Monsanto’s case, activistshave pursued both strategies, targeting not only Monsanto because it is the most outspokenproponent of genetic engineering (“we are always a target of opponent action,” Mr. Shapiro says)but also targeting consumer product companies like Campbell’s, Kellogg’s, and Kraft. For thelatter, consumers have been encouraged to support letter-writing and grassroots campaigns topressure these market leaders to change their stance on GM foods.

On July 17, 2000, high visibility protests were organized in 20 cities across the US byGEFA to generate media awareness and introduce the issue of GM foods back into the publiceye. While activists have pursued the traditional picket line approach, some groups have adoptedmore aggressive campaigns against Monsanto and the other Gene Giants. Examples include aMonsanto and Genetically Modified Foods

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protest at Monsanto headquarters in St. Louis where local members of MoRage (MissouriResidents Against Genetic Engineering) organized a “national day of action” to protestMonsanto’s and the US government’s attempt to “choke GM’s down their throats.” Theygenerated media attention by hanging a huge banner “Congrats Monsanto: World’s #1 Genetic

Polluter” and inflating huge ears of corn to represent the “Frankenfoods” they were protesting.

As the Starlink scandal draws increased attention, national activist groups have stepped upto the plate to represent their concerns. Given the impending threat of the negative imageassociated with GM foods, McDonald’s, Burger King, Heinz, Gerber, Wild Oats Markets, WholeFoods Markets, and Kraft have all announced their decision to use GM-free materials.

Monsanto’s Nonmarket Strategy

Resistance by Kraft andother consumer food companies to use GM supplies suggests thebeginning of a potentially difficult time for producers of GM products, including Monsanto.When Mr. Shapiro became CEO of Monsanto in 1995, he demonstrated his commitment toagricultural biotechnology (“ag-biotech”) by spinning off the company’s chemical operations tofocus on its ag-biotech capabilities. Shapiro has aggressively pursued acquisitions of otheragricultural seed companies, and as a result, has become the leader in the biotech arena.Monsanto has also become “heavily saddled with debt.” This weak financial positionprecipitated the 1999 Monsanto merger with Pharmacia. While Pharmacia’s CEO has takenconsiderable interest in Monsanto’s pharmaceutical position, he has appeared more anxious tounload the ag-biotech divisions of Monsanto. As a result, Pharmacia has recently sold nearly20% of Monsanto to the public as an IPO. Analysts believe that this new “ag-focused Monsantowill need to convince Wall Street–

and a skeptical public--

that ag-biotech is not a dead end.”Aside from its heavy debt load, Monsanto faces another financial hurdle when its US patentexpires for its single biggest and most profitable product: the $3.2 billion Roundup herbicide.Monsanto and Genetically Modified Foods

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Given these economic realities, Monsanto’s future rests on commercializing its biotech expertiseinto successful GM products for the world’s agricultural industry.

Our telephone interview with Mr. Shapiro on November 16, 2000, revealed Monsanto’sperspectives on the issue of GMfoods. Mr. Shapiro asserted that Monsanto’s market andnonmarket strategies have been consistent over the years, and he emphatically stated Monsanto’sposition in the debate over mandatory labeling of GM foods:

“Let me be clear. We have not taken an anti-labeling position. Our position is asfollows: first, consumers have a right to know everything they want to know (headvocates access to food information through brochures, toll-free numbers, websites,etc.), and second, societies must choose how they want to deal with the issue.”

Despite this “pro-info” position, further discussions revealed that Monsanto’s de factostrategy has still focused on preventing mandatory labeling of GM foods due to the negativeperception that labeling would bring to GM foods. Mr. Shapiro explained that it would bedifficult for the FDA to draw the line on labeling policies; he argued that studies so far have notshown conclusive evidence that GM foods have been harmful to consumers: “once you are infavor of labeling, how

much labeling do you actually do? Labeling information causesconsumers to think that there is some difference between the GM and GM-free products when infact there is not.”

Media Treatment

As discussed previously, media coverage on GM foods has been extensive. This is hardlysurprising since the issue has both high societal significance and high audience demand.Ordinarily, the media would approach this type of issue with a strong and clear advocacy stance.In this case, however, the complexity of the issue (the safety of GM products) and consumerignorance (little sense of urgency or immediacy) have contributed to the media’s weak andsometimes confused perspective.

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Given that the spotlight is on the two government agencies and not on the life-scienceindustry, Monsanto is keenly instituting a quiet media strategy because 1) Monsanto does notwant to establish and affirm the media as an arena for activists to debate issues with the life-science industry, and 2) the company will have little credibility

with consumers anyway. Thusthere is little to gain from a media campaign since journalists are likely to be more interested invilifying Monsanto (which supports their current stories) rather than giving balanced viewpoints.In our interview, Mr. Shapiro pointed out that the media has traditionally been only interested intwo kinds of stories from life-science companies: either a story on a great scientific breakthrough(10% of all stories), or depicting corporate greed and how this hurts our society (90% of allstories). Given these long odds, Monsanto recognizes that “laying low” is the best strategy.

While activists claim that they want labeling for ethical and moral reasons, Mr. Shapiroclaims that what activists actually want is to mislead consumers into believing that there aresignificant differences in taste and quality between GM and GM-free foods. Still, he insightfullyrecognized that companies like Monsanto are frequently portrayed as embodiments of corporategreed. “When you are making complex arguments, your credibility is virtually zero.” Like Shellin the Brent Spar Case, Monsanto understands that consumers would not immediately trust it tomake the right decisions: “after a while, the notion of simply being quiet gets to be veryappealing… you don’t worry about looking bad because it is about impossible for anycorporation to look good all the time.”

While it has kept its name as much as possible out of the current public debate, Monsantohas been working hard behind the scenes to influence the GM food debate. It has hired a publicrelations firm, Burson-Marsteller, to meet with local farmers, unions, consumers, and faith-basedgroups to pitch to them the merits of GM foods. According to one activist group, Monsantoemployed “scare tactics” and forced the Fox Network to fire two journalists producing a story onMonsanto and Genetically Modified Foods

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one of Monsanto’s biotech-related products. Monsanto has also formed a coalition with otherGene Giants to spend $50 million over the next few years “on television advertising and othermeasures to defend their products.” GEFA, by contrast, has only a mere $1 million budget.

Classification of interest group politics

Proponents of the status quo include Monsanto and other Gene Giants, who are wellorganized and funded to lobby heavily in Congress. Although the consumers are organized intoactivist groups, outcomes to change the status quo are widely distributed. Thus, we wouldclassify the current interest group climate as one of client politics, where Monsanto and itsnonmarket

allies can be perceived as special interests. Activist groups, as discussed in thiscourse, should attempt to move from client to entrepreneurial politics, and Mr. Nader’s entranceon the scene illustrates that. In October 2000, Mr. Nader “called for legislation to require labelson all genetically altered products, and a reevaluation of public policy towards genetically alteredlife forms.” It is too early to tell whether Mr. Nader’s involvement will have an effect on thepublic perception and political climate.

Rent Chain Analysis

Monsanto’s rent chain (Exhibit 6) consists of seed producers, farmers, food processors,consumer good companies, retailers and consumers. Since Monsanto is upstream of the entirechain, it faces challenges in mobilizing therent chain on issues that are important to them.

Previously, seed producers were able to negotiate a significant portion of the profit awayfrom Monsanto by simply denying them access to their farming constituents. Monsanto realizedits disadvantaged position and has over the last few years acquired seed producers to overcomethis hurdle. By gaining a greater role as a “seed distributor,” not only has Monsanto gained theability to effectively market its products directly to farmers, but it can also better understand theneeds of its farming customers through greater, direct interaction. As indicated above, farmersMonsanto and Genetically Modified Foods

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greatly benefit from Monsanto’s genetic research by obtaining crops that provide greaterresistance to insects and harsh weather conditionsand have higher production yield, longer shelflife and greater nutritional value. These attributes help farmers reduce cost and increaserevenues for their crop sales. According to the publicationForeign Affairs, farmers are the“biggest winners, capturing roughly half of the total economic benefit from the new technology.”These benefits erode quickly if farmers are asked to incur the sizable costs required to separatetheir GM and GM-free foods, and as a result, they will mobilize with Monsanto to lobby local,state and Congress representatives. Farmers already have a strong presence in the regulatoryarena, which only helps their support for the status quo, and provides an existing structure forMonsanto to exploit.

Food processors such as ADM and Cargill also benefit from Monsanto’s activities by theirability to buy cheaper products from the farmers who compete in a perfect market (i.e., sincefarmers have lower costs, theoretically the farmers end up selling their product at lower prices tothe food processors). Thus ultimately, the food processors enjoy a significant advantage fromthe research that Monsanto produces.

Similarly, consumer good companies and retailers also enjoy cost benefits that GM foodsprovide the market. But in spite of these gains, the needs and concerns of the consumer are moreimmediate. As activist actions have gained greater media attention, consumer awareness on GMfoods is rising. Due to the sensationalized stories that activists are circulating within the mediaandconcerns for their own brands, these members of the rent chain have been the first to sway tothe activists. Their direct relationship with consumers is more critical than the indirectrelationship with Monsanto.

Thus it is difficult for Monsanto to fully mobilize its rent chain due to the susceptibility ofconsumer-good and retail companies to consumer perception and activist activities. Also, theMonsanto and Genetically Modified Foods

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substitute to GM foods (i.e., natural, conventional foods) are easy to come by and currently offera zero-to-low switching cost for the consumer. Monsanto can mobilize parts of the chain,specifically the farmers, the seed companies, food processors, and grocery manufacturers, but theretailers and consumers take an opposite or at least a neutral position.

Regulation and Legislation

Under the current US system, three main groups regulate jurisdiction for biotechnologyresearch and development: the FDA, USDA, and EPA. In regards to GM food labeling, the maininstitution responsible for setting guidelines and

mandating new requirements is the FDA. (TheUSDA and EPA focus on issues of agricultural safety and environmental protection). Under thecurrent labeling stature, the FDA requires labels for two main reasons: first, to provide importanthealth and safety information; second, to provide consumers with accurate and reliableinformation in order to enable them to make informed choices in the marketplace (i.e.,consumers’ right to know). Due to the lack of conclusive health evidence as explained earlier,the debate over whether labeling requirements should encompass GM foods are being debatedboth in the regulatory and legislative arenas.

On the regulatory front, the FDA has come under severe criticism from activist groups andalso from the European Union due to their status quo stance of not requiring GM food labels.The FDA asserts that “under existing policy for biotech foods, labeling is required when there isa significant compositional change in the product, when the food is nutritionally different fromits traditional counterpart, or when a potential allergen has been introduced.” With the scientificevidence currently available, the FDA considers GM foods equivalent to conventional foods.

This viewpoint is not surprising. Over the years, many biotech companies, Monsanto inparticular, have developed strong relationships with the FDA and other key regulatory bodies.By providing scientific data and conducting joint industry/congressional studies, Monsanto hasMonsanto and Genetically Modified Foods

On the legislative front, Monsanto is facing a tougher battle. Activist groups are beginningto gain greater support with congressional officials. This influence is due to increased mediaattention that has aroused awareness of the voting constituencies of the elected officials. Earlierthis year, two bills were introduced in

Congress that if passed will require mandatory labeling ofGM foods. The first was introduced in the House of Representatives by Rep. Dennis Kucinich(D., Ohio), while the other was proposed separately by Senator Barbara Boxer (R., California).The legal premise for both of these bills is the consumers’ right to know.

Monsanto and the trade associations (especially the Grocery Manufacturers Association,GMA) have tried to stop such legislation by arguing that mandatory labeling would misleadconsumerssince they would imply that transgenic products are unsafe or have differentnutritional characteristics. This could lead to consumer confusion, the kind of confusion thatfood labels are designed to avoid. As explained above, Monsanto’s strategy is to keep with its“de facto” no labeling strategy. From our conversation with Mr. Shapiro, it appears thatMonsanto is actively lobbying Congress to support and understand the industry’s position inregards to labeling, although Mr. Shapiro did not directly discuss this.

At the state level, activists are also influencing state legislatures. For example, in Californiaand Minnesota, bills are being developed that require food manufacturers and sellers to requirestate level labeling of GM foods. According to Mr. Shapiro, Monsanto has taken a passive viewto these developments since he feels that Monsanto’s participation at this level is not the best useof its resources. Most of the opponents for GM labeling at this level have been trade associations(e.g., GMA). Given the early life cycle of the GM labeling issue, it may prove ill-advised forMonsanto and Genetically Modified Foods

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Monsanto to take a negligent view to state legislatures. If states do pass such laws, it will tend toincrease media scrutiny and serve to set dangerous precedents, possibly influencing labelingrequirements at the federal level.

In the international arena, Monsanto and the other biotech firms have faced a setback withEurope’s moratorium on GM crops. The EU is currently in the process of passing a cohesiveGM labeling

law. Such a law, if fully enacted, will reduce U.S. exports to Europe since much ofthe present U.S. exports are GM crops. Furthermore, if the U.S. would like to continue exportingconventional crops, the agricultural industry and/or the U.S. government

will need to address thecurrent distribution infrastructure. The current infrastructure mixes all grain in silos and does notsegregate one payload from the next; thus, attempts to track GM crops will be challenging. Inorder to sustain U.S. export levels, U.S. officials are trying to pressure the EU to soften its GMlabeling stance, a viewpoint that Monsanto greatly favors. As Mr. Shapiro pointed out, enactingsuch legislation within the EU “is challenging and may be difficult to implement effectively.” Ininternational matters, Monsanto is trying to influence issues through BIO, a broad biotech tradegroup. Only time will tell how successful Monsanto’s regulatory and legislative activities willbe on the issue of GM food labeling.

Recommended Strategy in Response to the Possibility of FDA Changing its Labeling Policy

Given the recent negative media coverage and intense pressure on the FDA for betterregulations, tougher labeling standards on GM foods can be expected. After the Starlinkincident, FDA has announced a public hearing period before deciding on the labeling issue.From our conversation with Mr. Shapiro, it seems that Monsanto is taking a wait-and-seeapproach to its anti-labeling stance. While Monsanto’s quiet media and behind-the-sceneslobbying strategies have been working well, these tactics are only aimed at preserving the statusquo. Since FDA’s public hearing signals a possible change in policy stance, Monsanto needs toMonsanto and Genetically Modified Foods

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have a clear and responsive strategy ready in the event thatFDA announces its departure fromthe status quo. If FDA does signal this change, Monsanto’s strategy should be advocating theagency toward voluntary negative labeling.

Pushing for voluntary negative labeling means that instead of having labels that indicate thepresence of GMO2

is not based on scientificevidence and could work to make consumers worry about safety issues when there currently isno basis for it. Even the FDA’s stance has been consistent throughout the years–

labelingshould be based primarily on safety concerns

and then on product identity, not ambiguous orsuperfluous information. Thus instead of forcing labels on GM foods, producers of non-GMOproducts may label their goods as GMO-free to differentiate their products. Second, it isimpractical from the costperspective to label all GM foods. There exists substantial costs tosegregate biotech crops and non-biotech crops, and labeling would require segregation at alllevels of planting, harvesting, shipping, processing and distribution. This would lead to highercosts for producers and ultimately the loss of benefit from GM produced crops. Voluntarynegative labeling provides advantage to GM-free products by differentiation, but fairly transfersthe costs of traceability to the entities that derive these benefits. This is best described by theFinancial Times (London), "Superfluous labeling requirements for new biotech products wouldconstitute, in effect, a tax on the use of a new, superior technology. Consumers, whose priceswill be raised and choices diminished by the regulatory tax, would be better served by industryspending its resources on research and development to create improved, safer products."

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Monsanto must also align interests to form coalitions in order to enhance the probability thatFDA would

implement the voluntary negative labeling standard. One such coalition would bewith farmers. The mandatory labeling of GM foods is in opposition to many farmers, since itmeans that they either abandon cost-effective biotechnology farming altogether, or

that theyinvest in expensive tracking equipment to determine the GMO content of their crops. Eitheralternative substantially raises costs and ultimately erodes the competitiveness of the Americanagricultural industry. Since farmers have a large impact on local, state, and federal votes, havingthem as members of the coalition could be critical.

In conclusion, the issue of GM foods labeling is complex, and Monsanto faces a difficultfight in maintaining powerful coalition partners who will not succumbto consumer pressures, inpreserving its reputation and credibility, and in mobilizing members of its rent chain. Thus far,the company’s lobbying efforts for the FDA to maintain the status quo of labeling and its quietmedia strategy have been effective.

However, this landscape will most likely change due tomounting pressure on government agencies, most specifically the FDA, to further regulate thebiotech industry.

To ensure survival, Monsanto must be proactive in readying a strategy should the FDAannounce its intention to explore additional labeling regulations. Mr. Shapiro seems to believethat the status quo will not change, but he would be wise to investigate all potential outcomesand form appropriate strategies to address them. Monsanto appears to face an uphill climb onthe issue of GM foods, and it should begin the ascent with the tools and equipment to face anyforeseen and unforeseen obstacles.